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Investment Advisers May Soon Have A SRO – And FINRA Wants To Be It

Recently, Congressmen Spencer Bachus, Chairman of the House Financial Services Committee, circulated a draft bill entitled The Investment Adviser Oversight Act of 2011(the “Bill”). If introduced and passed, the Bill will amend the Investment Advisers Act of 1940 to require both federal and state-registered investment advisers to become a member of a national investment adviser association (“NIAA”).  Among other things, the Bill provides for the NIAA to implement rules designed to prevent fraudulent and manipulative acts, protect investors, and outlines how the NIAA may apply to register as the overseer of investment advisory industry. Importantly, the Bill also lists exemptions for investment advisers with assets of 90% or more attributable to the following types of clients from having to become a member of the NIAA:

  • Investment companies registered under the Investment Company Act of 1940 ( e.g., mutual funds);
  • Non-U.S. persons;
  • Clients that in the aggregate own not less than $25 million in investments;
  • Funds organized for charitable or religious purposes;
  • Pension or profit sharing plans;
  • Private funds (including hedge funds and private equity funds relying on an exemption under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act); and
  • Venture capital funds.

Some observers believe that the Bill was drafted specifically with an eye toward FINRA expanding its role to include examining and overseeing investment advisers.  To this end, during a congressional hearing relating to the Bill held on September 13, 2011, FINRA asserted to Congress that it is well equipped to become the NIAA.  In his testimony before the House Committee on Financial Services, Richard Ketchum, FINRA’s Chairman and CEO, stated that FINRA is “uniquely positioned”  to help with the regulation of investment advisers.  Last week, various members from the Commission indicated at compliance conferences that we will likely know the result of this proposal before the end of 2011.For more information, please contact the JLG team at (619) 298-2880.

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